Navient Corporation is among the defendants in yet another proposed class action that alleges the company misled student loan borrowers.

The 23-page complaint alleges Navient, facing an “existential threat” after the passing of a federal law in 2010 that ended the government’s Federal Family Education Loan Program (FFELP), “intentionally misled” borrowers away from government-offered repayment options that would have been in students’ best interest – but would have caused a loss in revenue for Navient. Navient accomplished this, the lawsuit alleges, by, among other alleged tactics, purposely omitting information in conversations with borrowers in an attempt to prevent or delay the individuals from consolidating their obligations through the Department of Education.

First, some background…

Formally filed against Navient Corporation, Navient Solutions, LLC (formerly Sallie Mae), and Studebt (a company the case says purports to provide debt consolidation services and goes by Student Debt Relief Group or Student Loan Relief Counselors), the lawsuit begins by explaining that Navient is the holder of the largest portfolio of student loans guaranteed under the Federal Family Education Loan Program (FFELP). This portfolio, as of December 31, 2016, reportedly totals more than $87.7 billion.

The complaint further clarifies that Navient pools individual student loans in the aforementioned portfolio into “securitized trusts” backed by the student loans, which are known as student loan asset-backed securities (or, commonly, by their more garish nickname, SLABS). These SLABS are, in turn, “repackaged” and sold off to investors in staged classes, or “tranches,” effectively providing Navient with its top source of revenue, the lawsuit says.

The end of the FFELP and the start of an “existential threat” to Navient

The case notes that the signing of the Health Care and Education Reconciliation Act of 2010 (HCERA) brought an end to the origination of student loans guaranteed under the FFELP, but did not wipe away existing loans themselves. Crucially, the passing of HCERA, the lawsuit says, offered FFELP borrowers an opportunity to consolidate their FFELP loans into a “direct consolidation loan” with the Department of Education, which offered a discount of 0.25 percent interest to incentivize borrowers.

“Given the option for a discounted interest rate, a direct consolidation loan was in the best interest of virtually every FFELP borrower,” the complaint says, something Navient allegedly neglected to mention to many borrowers.

According to the complaint, Navient still acquires and finances existing FFELP loans, which, as previously mentioned, are repackaged and sold to investors as SLABS.

So, What’s the Real Problem for Navient Here?

The lawsuit claims that because the option of direct consolidation of student loans was now available from the Department of Education, Navient realized it could face a sudden increase in loan “prepayment,” i.e. when a borrower makes extra payments to reduce the balance of his or her loan, or even pay off the entire balance, without being charged additional fees. With an increase in prepayment of FFELP loans could come a drop in fees reaped by Navient as a loan servicer, the company allegedly realized, and a consequent decline in value of any residual interest held by the company in its aforementioned securitization trust, according to the suit.

“Because the direct consolidation of loans were made directly from the Department of Education, upon consolidation, the owners of FFELP loans, such as Defendant Navient, would face a loss of revenue due to the sudden repayment of the loans,” the case says.

Navient, even further, allegedly took the step of warning its shareholders of the threats posed by the Department of Education’s consolidation offering.

What did the plaintiff say happened to him?

The plaintiff, a former Niagara University student, claims that during consultations with Navient to explore his best options for repayment and the removal of a cosigner on one of his obligations, the company purposely neglected to mention that the man’s best repayment option would be a direct consolidation of his FFELP loans through the Department of Education. According to the lawsuit, Navient “intentionally misled or confused” the plaintiff in an attempt to prevent or delay him from consolidating through the government, an alleged example of the defendant’s practice of relying on the financial naiveté of borrowers who go to the company seeking advice.

Where does Studebt allegedly fit into all of this?

The lawsuit outright alleges Studebt to be a predatory entity purporting to offer borrowers debt consolidation/relief among a crop of similar companies that sprouted up as, the case says, a “direct and foreseeable result of Navient Solutions’ fostered climate of confused and misled borrowers.” Citing possible violations of the Telephone Consumer Protection Act (TCPA), the lawsuit asserts Studebt contacted the plaintiff’s cell phone “out of the blue” in 2014 to solicit its student loan consolidation services. Where Studebt violated the TCPA, the lawsuit claims, is when it used automatic dialing technology to contact the plaintiff without first obtaining prior express consent to do so.

Furthermore, in the fall of 2014, Studebt allegedly called the plaintiff and informed him he would “save thousands of dollars, that he could qualify for Public Service Loan Forgiveness, and that he would see his monthly payment go down” if he enrolled with the company. Additionally, Studebt allegedly told the plaintiff he should never contact the Department of Education himself, as it could interfere with the company’s handling of his loans. After paying an initial $599 and signing up for monthly payments of $39, the plaintiff enrolled in Studebt’s services.

While the plaintiff believed his money was going toward his student loans, Studebt allegedly fraudulently obtained power of attorney from the plaintiff to consolidate his loans with the Department of Education, the case claims, and then used the power of attorney to enroll the man into forbearance.

“As a result, although the plaintiff was making continuous monthly payments, he was not actually making payments toward his student loans, which remained in forbearance accruing interest,” the lawsuit claims. “Instead, the payments were simply going to Studebt.”

The plaintiff says he was contacted by a servicer for his Department of Education consolidation loan who informed him that he had not made a payment since the loans’ initial consolidation in 2015.

New York Attorney General’s Involvement

The lawsuit rounds out by noting the plaintiff reportedly contacted the New York State Attorney General’s office about Studebt’s alleged scheme in early 2017, after which, the case says, Studebt “immediately wired all of [the plaintiff’s] payments, including his $599 ‘initiation’ fee and $39 monthly payments” back into the man’s bank account.

Who does this lawsuit seek to cover?

The class proposed by the lawsuit includes all individuals who held an FFELP loan with Navient Solutions (or Sallie Mae) between 2010 through the present. In addition, the suit names a proposed subclass of all members of the proposed class who were also customers of Studebt.